Are These Prices Supported By Eaton?

With shares of Eaton (NYSE:ETN) trading around $61, is ETN an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

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T = Trends for a Stock’s Movement

Eaton operates as a diversified power management company worldwide.  It provides electrical products, systems, and services for power quality, distribution, and control to just about every industry across the globe. Eaton offers industrial products that are a basic requirement for most businesses to maintain operations. As long as companies continue to seek growth, Eaton is well-positioned to provide the products necessary.

Head on over to the next page to explore the technical landscape of Eaton’s stock…

T = Technicals on the Stock Chart are Strong

Eaton has displayed a magnificent uptrend for over the last two decades. Just this year, the stock has made all-time highs and does not look like it wants to slow down. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Eaton is trading above its rising key moving averages which signal a strong uptrend in the near-term.

ETN

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Eaton options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Eaton Options

24.81%

46%

40%

What does this mean? This means that investors or traders are buying a good amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

April Options

Flat

Average

May Options

Flat

Average

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As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a good amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Mixed Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Eaton’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Eaton look like and more importantly, how did the markets like these numbers?

2012 Q4

2012 Q3

2012 Q2

2012 Q1

Earnings Growth (Y-O-Y)

-56.6%

-4.67%

15.46%

9.64%

Revenue Growth (Y-O-Y)

7.44%

-4.2%

-0.54%

4.13%

Earnings Reaction

4.93%

5.01%

3.88%

-0.08%

Eaton has seen mixed earnings and revenue growth rates over the last four quarters. From these figures, the markets have been happy about Eaton’s last four earnings announcements.

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P = Average Relative Performance Versus Peers and Sector

How has Eaton stock done relative to its peers, ITT (NYSE:ITT), Johnson Controls (NYSE:JCI), Parker-Hannifin (NYSE:PH), and sector?

Eaton

ITT

Johnson Controls

Parker-Hannifin

Sector

Year-to-Date Return

8.5%

16.95%

11.37%

4.47%

10.63%

Eaton has been an average relative performer year-to-date.

Conclusion

Eaton is an established company and provides essential products and services to various businesses worldwide. Eaton has seen mixed earnings and revenue growth but investors have liked the improvements. The stock is currently displaying a strong uptrend but it has led it to become an average performer relative to its peers and sector. Look for Eaton to continue to OUTPERFORM.

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